BILL ANALYSIS SENATE JUDICIARY COMMITTEE S Charles M. Calderon, Chairman B 1995-96 Regular Session 2 1 1 0 SB 2110 Senator Maddy As amended on April 15, 1996 Hearing Date: April 23, 1996 Revenue and Taxation Code GEH:cb unruh civil rights act - definition of "business establishment" - - private clubs and fraternal orders - HISTORY Source: California State Club Association Related Pending Legislation: None known KEY ISSUES 1. should tax-exempt private clubs and fraternal orders be exempted from the unruh civil rights act? 2. is this bill a complement to the constitutional right of association, or is it made unnecessary by that constitutional protection? PURPOSE Existing law, the Unruh Civil Rights Act (Civil Code Sections 51, et. seq.) provides that: "All persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, or disability are entitled to the full and equal accommodations, advantages, facilities, privileges, or SB 2110 (Maddy) Page b services in all business establishments of every kind whatsoever." (emphasis added). The statute provides for civil actions in which a court may award up to three times the amount of the plaintiff's actual damages. In 1994, as a result of SB 1288 (Calderon), the minimum damage award was increased from $250 to $1000. Injunctions may also be granted to enforce the provisions of the statute. "Business establishment" is not presently defined in the statute. Case law has interpreted the term to include certain types of nonprofit organizations and private clubs that operate traditional public accommodations, have "business-like attributes," or engage in "regular and repeated business transactions with non-members. This case law is discussed in detail below. This bill amends the sections in the Revenue and Taxation Code related to the tax-exempt status of certain organizations, and declares that if those organizations qualify for an exemption under ?501(c)(7), ?501(c)(8), or ?501(c)(10) of the federal Internal Revenue Code (IRC), then those organizations "shall not be considered a business establishment" notwithstanding any other provision of law. The effect of this provision is to exclude these organizations from the definition of "business establishment" under the Unruh Civil Rights Act. The bill does not appear to have any other effect. IRC ?501(c)(7) exempts from taxation clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. IRS guidance documents state that up to 15 percent of a tax-exempt club's gross receipts may be derived from the use of a social club's facilities or services by the general public. Exempt Organizations Continuing Professional Education Technical Instruction Program Textbook (IRS Exempt Organizations Division, 1995) SB 2110 (Maddy) Page c ?501(i) provides that an organization may not qualify under (c)(7) if its charter, bylaws, or any written policy provides for discrimination against any person on the basis of race, color, or religion. However, a club may limit it membership to members of a particular religion if it does so in order to further the teachings or principles of that religion. IRC ?501(c)(8) exempts from taxation fraternal beneficiary societies, order, or associations which operate under the lodge system for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and which provide for the payment of life, sick, accident, or other benefits to the members of such organization or their dependents. IRC 501(c)(10) exempts from taxation domestic fraternal societies, orders, or associations operating under the lodge system, the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational and fraternal purposes, and which do not provide for the payment of life, sick, accident or other benefits. COMMENT 1. Should tax-exempt private clubs and fraternal orders be exempted from the Unruh Civil Rights Act? a) Case law interpreting the term "business establishment" The California Supreme Court has held that the words "all" and "of every kind whatsoever" in the definition of "business establishment" indicate legislative intent to construe that term "in the broadest sense reasonably possible." Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 468. In accord with this principle of statutory construction, the Supreme Court has held that "private" clubs or organizations are not automatically excluded from being considered "business establishments", and neither are nonprofit organizations, if those clubs or organizations have SB 2110 (Maddy) Page d sufficient "business-like attributes." The Supreme Court has noted that, as initially introduced, the bill enacting the Unruh Civil Rights Act would have explicitly prohibited discrimination by a list of types of businesses and establishments, including "all public or private groups." The final version of the bill replaced the list with the single phrase, "all business establishments of every kind whatsoever." The Court has specifically rejected the contention that this single catch-all phrase was intended to cover everything in the prior version's list, including all private groups. Warfield, infra at p. 618. However, the Court has also held that "nothing in the language or history of its enactment calls for excluding an organization from its scope simply because it is nonprofit." O'Connor v. Village Green Owners Assn. (1983) 33 Cal.3d 790, 795-6. Prior to the Warfield decision discussed in the next section, the California Supreme Court had found three different private nonprofit organizations to be "business establishments." The first case, O'Connor, supra, held that a non-profit homeowners association responsible for maintaining the common areas of a condominium development was a "business establishment." In Isbister v. Boys' Club of Santa Cruz (1985) 40 Cal.3d 72, the Court held that a Boys Club which operated a gymnasium and pool open to any boy in the community willing to pay a $3.25 annual membership fee was a "business establishment" because the recreational facility was the type of traditional public accommodation to which the Unruh Act's predecessor antidiscrimination statutes have applied since 1897. In another decision, the California Supreme Court held that a Rotary Club was a "business establishment" because a Rotary Club "encourages business relations to grow and . . . enhances the commercial advantages of its members." Rotary Club of Duarte v. Board of Directors (1986) 178 Cal.App.3d 1035. As is discussed in comment #2 below, this decision was affirmed by the SB 2110 (Maddy) Page e United States Supreme Court (1988) 481 U.S. 537. The California Supreme Court has granted review to two appellate cases decided in 1994 which have reached opposite results on the issue of whether regional Boy Scout Councils are "business establishments." In Randall v. Orange County Council (1994) 22 Cal.App.4th 1526, the 4th District held that the Orange County Council of Boy Scouts was a business establishment, and that it therefore could not refuse membership to two boys who did not believe in God. In Curran II, supra, the 2nd District held that the Mount Diablo Council was not a business establishment, and it therefore could refuse to allow a homosexual to be an adult Scout leader. b) The latest development: Warfield In June of last year, the California Supreme Court held that an exclusive private country club was a "business establishment" for purposes of the Unruh Civil Rights Act. Warfield v. Peninsula Golf and Country Club (1995) 10 Cal.4th 594. In Warfield, a woman had been awarded the regular family membership in the country club in a judgment of marital dissolution. The club subsequently informed her she was not entitled to be a proprietary member of the club because she was a woman, and tendered a check for the value of the membership. Ultimately, she was offered a special category of membership apparently created for her which would have entitled her to use the golf facilities. She rejected this offer because she believed it was a "second class citizenship" membership. The club had 700 total memberships, 350 proprietary and 350 nonproprietary memberships. In addition to the 700 members, their family members had unrestricted access to the club. The club employed between 80 and 110 people, who were entitled to use the facilities on Monday, when the club was closed to members. The Court held the club was a business establishment and had violated the Unruh Act by denying the woman a membership on the basis of her SB 2110 (Maddy) Page f sex: Although a 'truly private social club' generally would not constitute a 'business establishment'..., the club in question . . . - because it engaged in a variety of 'business transactions' with nonmembers on a regular basis - properly must be found, in light of this court's prior decisions, to fall within the very broad terms of section 51, which extend the act to all business establishments of every kind whatsoever. Id. at p.630. The Court found that the country club obtained financial benefits from three types of regular and repeated business transactions on its premises with non-members: 1) On the average of once a week, the club permitted nonmembers to use its facilities, for a fee, for events such as golf and tennis tournaments, wedding receptions, bar mitzvahs, fashion shows, and special luncheons and dinners. The Court found that, in this respect, the club was operating as the functional equivalent of a commercial caterer or commercial recreational resort, and was presumably competing with business establishments offering such services. 2) The club obtained income on a regular basis from fees paid by non-members for the use of its facilities and for the purchase of food and beverages on its premises. The Court found that, in this respect, the club was operating in a capacity that is the functional equivalent of a commercial enterprise. 3) The club obtained significant, indirect, financial benefit from regular business transactions conducted at the golf and tennis pro shops located on its premises which were operated by independent contractors. The Court indicated that the record did not reveal SB 2110 (Maddy) Page g what percentage of the club's revenue was derived from these sources, but the club's business manager testified that such revenue was "important" to the club. The business manager also testified that the club was in compliance with IRS guidelines for tax-exempt clubs. Warfield, supra at p.602,n.3. The Court strongly emphasized that only regular and repeated business transactions with nonmembers would convert a club into a business establishment. "A private club that raises funds from nonmembers by conducting, for example, an occasional car wash, garage sale, or auction would not probably be considered a 'business establishment.' " Id. at p.623,n.11. SB 2110 (Maddy) Page h c) The anxiety of private clubs after Warfield This bill has been introduced in direct response to the Warfield decision. The bill's sponsor, the California State Club Association (CSCA), an association of country clubs and private social clubs, believes the Warfield decision does not provide adequately clear guidance about how private clubs can ensure that they will not be treated as "business establishments." CSCA argues that, since Warfield based its decision on the extent of income derived from business transactions with non-members, this bill simply provides a bright line for determining how much income a private club can have without being subject to the Unruh Act. Private clubs already must abide by the 15 percent limitation established by the IRS, so they think that is the appropriate bright line. The proponents of the bill are "gravely concerned" about the prospect of being characterized as a "business establishment." CSCA writes: It is not clear whether, and to what extent, the public might have some right of access to a club's membership or facilities if the club is a 'business establishment' and subject to the Act. Since the essence of a club is selectivity of membership and privacy, any such public right would impair or destroy the club's tradition and fundamental character. . . . Thus, the full legal consequence of a club's being a 'business establishment' is also uncertain - and is an uncertainty of major import. The Warfield decision emphasizes that, even if a club is considered to be a "business establishment", that does not mean that it cannot engage in selective membership practices: Furthermore, our conclusion . . . does not mean, of course, that the club, as a general matter, cannot establish and apply its own SB 2110 (Maddy) Page i criteria for membership, but signifies only that the club may not arbitrarily exclude persons by discriminating on the basis of those 'personal characteristics' to which section 51 applies. Warfield, supra, at .623,n.11, citing Harris v. Capital Growth Investors, Inc. (1990) 52 Cal.3d 1142 To emphasize its point that private clubs deemed to be business establishments can still retain their selective membership status, the Court cites Harris, supra, which held that discrimination on the basis of economic status was not prohibited by the Unruh Act. In so holding, the Court disapproved of previous decisions which held that "all arbitrary discrimination" was prohibited by the Act, e.g. In re Cox (1970) 3 Cal.3d 205. Harris limited the reach of the Unruh Act to only discrimination based on "personal characteristics." Nevertheless, private clubs, even ones that state that they do not discriminate on the basis of any personal characteristic, believe that their very essence is threatened by a potential public right of access available under the Unruh Act under Warfield. The clubs therefore state that, unless this bill passes, many clubs will have no choice but to cease allowing non-members to use their facilities. CSCA writes: To avoid any risk of being held to be a 'business establishment' and subject to the Act, many clubs and lodges will be forced to discontinue their long practice of making their facilities available to various community, charity, and sports events. . . .The resulting financial and social loss suffered by the communities and their charities will be substantial. d) Arguments in opposition The opponents of this bill argue that any organization that does business with the general public should refrain from discrimination. Equal SB 2110 (Maddy) Page j Rights Advocates writes: [This bill] naively ignores the continuing discrimination that exists in society today and ignores the reality that, if such organizations are allowed to discriminate under the protection of law, the struggle for equality will take a giant step backward. California Women's Law Center believes that this bill is a "slap in the face for the courageous women who have struggled so long to gain access to a business world dominated by men." The committee has received letters from two individuals opposing this bill. One letter is from a couple who belong to a country club and believe this bill is an inappropriate attempt by country clubs like theirs to make it legal to discriminate against women. The other letter is from the wife of a member of a "private" social club who believes members of such clubs should pay for the privilege of discriminating against women and minorities by becoming "truly private", with no subsidies from non-member events. Opponents also argue that, by tying the right to discriminate to an organization's tax-exempt status, the bill inappropriately causes the federal and state governments to subsidize discrimination. 2. Is this bill a complement to the constitutional right to freedom of association, or is it made unnecessary by that constitutional protection? One of the arguments made by the sponsors is that this bill is necessary to safeguard the constitutional rights of club members to freedom of association. On the other hand, the ACLU argues that the constitutional right to freedom of association makes this bill unnecessary because any application of the Unruh Act that violated that right is already prohibited by the Constitution. a) United State Supreme Court cases on private clubs' rights to freedom of association SB 2110 (Maddy) Page k In the mid 1980s, the United States Supreme Court decided a series of cases holding that three different state discrimination statutes could be applied to prohibit private clubs from discriminatorily selecting their members, without violating the right to freedom of association. Roberts v. United States Jaycees (1984) 468 U.S. 466; (Minnesota could prohibit Jaycees from excluding women as members) Board of Directors v. Rotary Club (1987) 481 U.S. 537 (Pursuant to the Unruh Act, California could prohibit Rotary Club from excluding women as members); and New York State Club Assn. v. New York City (1988) 487 U.S. 1 (City of New York's ordinance prohibiting discriminatory practices by any private club with more than 400 members which served meals to nonmembers was not unconstitutional on its face). In these three cases, the court held that the "right" to freedom of association is in fact two distinct rights: 1) the freedom of intimate association, meaning the right to enter into and maintain intimate human relationships, which is secured as a fundamental right by the Fourteenth Amendment; and 2) the freedom of expressive association, meaning the right to associate in order to engage in activities protected by the First Amendment -- speech, political petition and assembly, and religion. In all three cases, the Court held that the clubs in question were far too large and public to be the types of relationships encompassed by the right to intimate association. The factors pertinent to the assessment of whether an organization is an intimate association include "size, purpose, policies, selectivity, congeniality, and other characteristics that in the particular case may be pertinent." New York State Club Association, supra. The New York State Club Association case is less instructive than it could have been on the right to intimate association because it was a challenge to an ordinance "on its face." Therefore, the court had no specific facts before it about the nature of the clubs in question, other than the fact they had over 400 members and served food to nonmembers. The court held SB 2110 (Maddy) Page l that many such large clubs would not be "intimate", and therefore the ordinance prohibiting them from discriminating was not invalid on its face. With regard to the right of expressive association, the Court held that the Rotary Club and Jaycees were organized for commercial purposes, not for the purpose of engaging in any of the core expressive, political, or religious activities protected by the First Amendment. There were no facts in the record in the New York State Clubs Association case to indicate that the clubs were organized for expressive purposes. Last summer, the United States Supreme Court issued an important decision about the right of expressive association. Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston (1995) ___ U.S.___, 115 S.Ct. 2338. In Hurley, the Court held that it was unconstitutional to apply a Massachusetts anti-discrimination law similar to the Unruh Civil Rights Act to require the organizers of a St. Patrick's Day parade to allow a group of gay and lesbian Irish-Americans to march. The court held that it was unconstitutional to require "private citizens who organize a parade to include among the marchers a group imparting a message the organizers do not wish to convey." Id. b) California cases on private clubs' rights to freedom of association In Warfield, supra the Court rejected the country club's claim that prohibiting them from discriminating would violate their freedom of association. The Court held the club was not an intimate association because of its regular and repeated business transactions with nonmembers, coupled with fact that "considerably more" than the club's 700 members (e.g. the members' families) had unrestricted access to the club. Id. at p.629. One state appeals court has held that the Unruh Act, as applied, violates an organization's freedom of association. In Curran II, supra (presently under review by the state Supreme Court) the appeals court SB 2110 (Maddy) Page m held that prohibiting the Boy Scouts from discriminating against a homosexual violated both of these rights of freedom of association. With respect to the right to intimate association, the court held that a single boy scout troop is the type of small, close-knit group which defines the right to intimate association. Therefore, a troop cannot be forced to include anyone the troop does not want to include. With respect to the right to expressive association, the court held that the purpose of the Boy Scouts is to teach a particular philosophy to young men. The court found that part of that philosophy is that homosexuality is immoral. Therefore the Scouts could not be forced to associate with someone who did not share that belief. Although it is not an Unruh Act case, Pacific-Union Club v. Superior Court (1991) 232 Cal.App.3d 60 is probably more relevant to the clubs at issue in this bill. In that case, the court held that it was unconstitutional for the Franchise Tax Board to subpoena the membership list of a highly selective San Francisco men's social club. The FTB wanted to determine if members were illegally taking business deductions for expenses incurred at a club that discriminates. The court held that even though the club had nearly 1,000 members, size is only one of the factors to be assessed. In light of the other factors ( purpose, policies, selectivity, congeniality), the court found that the club maintained a carefully enforced intimacy at its mansion on Nob Hill. Id. at 74. In Bohemian Club v. Fair Employment and Housing Commission (1986) 187 Cal.App.3d 1, the court held that the Bohemian Club violated the state Fair Employment and Housing Act by refusing to hire women employees during its annual summer conference at the Grove in Monte Rio. However, in holding that the Club's right to freedom of association was not violated by requiring it to hire women employees, the court strongly suggested that requiring it to have women members would violate its 2,000 members' right to intimate association. The court stated that "the Club's membership policy is extremely selective, and SB 2110 (Maddy) Page n the consequent relationship among members is undoubtedly "intimate" in associational terms." c) Conclusion: freedom of association and judicial discretion It seems clear that the Unruh Civil Rights Act, on its face, is not an unconstitutional infringement of the right of freedom of association. (See Hurley, supra , holding that Massachusetts' similar private discrimination statute was not unconstitutional on its face, even though it was unconstitutionally applied in that case). Therefore, there is no need for statutory change to cure a facial constitutional defect. It also seems clear that, in applied challenges, courts are willing to protect the associational rights of truly intimate or expressive clubs, and to allow them to discriminate in the violation of the Unruh Act. Leaving the courts with the discretion to determine when organizations must be allowed to discriminate in order to enjoy their associative rights ensures that the legislation is not written in a manner which allows discrimination which is not constitutionally protected associative behavior. By contrast, this bill, as Warfield demonstrates, would allow clubs to discriminate even though that discrimination is not a form of constitutionally protected association. Should the issue of protecting private clubs' CONSTITUTIONAL rights be left to the discretion of courts? 3. Committee has received unusually large amount of correspondence The committee has received approximately 1500 letters from individuals expressing their support for this bill. Most of these letters have been reprinted on the sender's personal or company stationery and simply state: "As a Registered Voter, I wish to express my support for Senate SB 2110 (Maddy) Page o Bill 2110 (Maddy). Please vote for its approval." Most of the letters in this category appear to come from members of country clubs, with a large number from the Monterey/Carmel/Pebble Beach area; and a large number from the Pasadena/San Marino area. There are a large number of signed copies of two form letters from Elks Lodge members. These letters state that the Order of Elks no longer discriminates against anyone, but its members are still afraid that they will not be allowed to invite their family and non-member guests to the social and charity events that have raised over $10 million for charitable organizations. The committee has also received many signed copies of a form letter that apparently was drafted by the Conference of Private Organizations of California. This letter raises similar issues to the Elks Lodge letter. The individualized letters of support generally emphasize the community benefits that derive from the writer's particular club's practice of allowing its facilities be used by nonmembers. These letters also emphasize the increase in dues that would be necessary if the writer's club did not receive income from allowing non-members to use its facilities. As indicated above, the Committee has also received two individualized letters in opposition to the bill. Support: California State Club Association; Conference of Private Organizations of California; California-Hawaii Elks Association; Sharon Heights Golf and Country Club; La Rinconanda Country Club; The Family; Approximately 1500 letters from individuals as noted above Opposition: California Women's Law Center; Equal Rights Advocates; Consumer Attorneys of California; ACLU; NOW; 2 letters from individuals Prior Legislation: SB 806 (1995) Held in Senate Judiciary SB 2110 (Maddy) Page p Committee **************